Vancouver-based Teck Resources to slash costs amid global coal glut

Bruce Constantineau, Vancouver Sun04.24.2014

Most of B.C.’s nine operating coal mines produce metallurgical coal. Its price has dropped from $330 US a metric tonne in 2011 to its current price of $120 a tonne.Peace photoGraphics Inc
/ Vancouver Sun

A coal truck at the Quintette coal mine near Tumbler Ridge, which was shut down in 2000.Steve Bosch
/ Vancouver Sun

A truck hauls a load at Teck Resources Coal Mountain operation near Sparwood, B.C. in a handout photo. THE CANADIAN PRESS/HO, Teck Resources ORG XMIT: CPW0827
/ THE CANADIAN PRESS

B.C.’s biggest coal producer will slash costs this year to stay profitable in an industry where the price of metallurgical coal has plunged 64 per cent in the past three years.

Teck Resources announced Tuesday it will cut its workforce by five per cent, about 600 jobs, with its coal operations likely to take the biggest hit.

It has also deferred the reopening of its Quintette coal mine in northeastern B.C., shut down in 2000, until market conditions improve.

The Vancouver-based mining giant made those disclosures while announcing its first-quarter profit this year fell to $105 million from $328 million during the same period last year.

Its gross profit from coal operations fell to $114 million during the quarter from $346 million a year earlier.

A worldwide coal glut has caused the price of metallurgical coal — used in making steel — to drop from $330 US a metric tonne in 2011 to its current price of $120 a tonne.

Reduced demand from Asian buyers and increased output from Australian suppliers have been cited as major factors in the price decline.

Most of B.C.’s nine operating coal mines produce metallurgical coal. Relatively small amounts of thermal coal — used in power generation — are produced at the Quinsam mine on Vancouver Island and the Basin mine near Princeton.

Teck produced 25.6 million tonnes of the 31.4 million tonnes of coal produced in B.C. last year and expects to produce another 26 million to 27 million tonnes in 2014.

Chief executive officer Don Lindsay estimates 35 million to 40 million tonnes of global steelmaking coal is being produced at a loss at current prices.

“Clearly that is not sustainable and even a portion of that closing down would bring the market back to balance,” he said Tuesday during a conference call. “Fortunately we are starting to see some curtailments but more is needed in order to bring the market back into balance and achieve better pricing.”

Walter Energy announced last week the immediate closure of its Wolverine coal mine near Tumbler Ridge and the July closure of its Brazion mine near Chetwynd. The combined operations employ about 700 workers and produce 3.6 million tonnes of metallurgical coal annually.

Lindsay said Teck has no plans to close any of its coal mines.

“We are in a better position, on the cost curve, than a large part of the industry — particularly those that are cash negative,” he said. “If we actually cut production and caused the price to go up, we would be helping them to stay in business and our shareholders would be the losers for that, at least in terms of market share.”

Teck estimates its coal production and transportation costs range from about $85 US to $93 US a tonne.

The company expects to save about $100 million this year through the workforce reduction that will come through attrition, hiring freezes and reductions in contractors and employees at operations and corporate offices.

Another $100 million is expected to be saved by other measures, including delaying spending on certain plant and equipment improvements.

Restarting the Quintette mine near Tumbler Ridge would have created up to 500 full-time jobs. Lindsay said it will take about 14 months to get the mine in full operation once a decision has been made to proceed.

Scotiabank commodity market specialist Patricia Mohr said coal prices peaked in 2011 when strong demand from China and Japan combined with supply constraints in Australia to push the price to $330 US a tonne.

But she noted coal mine expansion in Australia has drastically increased the global coal supply.

“There is more than ample supply now and in recent months, even some of the Australian mines have been shut down,” Mohr said.

Coal Association of Canada president Ann Marie Hann said these are clearly challenging times for the coal industry but stressed the longer-term indicators remain positive.

“Over the next 15 to 20 years, the global demand for steelmaking coal is expected to increase by 50 per cent,” she said. “The challenge right now is that large economies like China are underperforming and the question is how long will it take for China’s economy to pick up again. Once that happens, coal prices should move along with it.”

Hann said more Canadian coal mine closures are possible, depending on the financial positions of the companies involved.

“These are decisions that will be unique to every company and every mine because every mining operation offers different rates of return,” she said. “We’re in a wait-and-see period now really.”

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Vancouver-based Teck Resources to slash costs amid global coal glut

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